By Robert J. Samuelson
Monday, January 26, 2009
We all want President Obama to succeed in reviving the economy, but that shouldn't obscure the long odds he faces. We need to recognize that we're grappling with three crises that, though interwoven, are also quite distinct. The solution to any one of them won't automatically resuscitate the larger economy if the others remain untreated and unchanged.
Here are the three.
First: the collapse of consumer spending. American consumers represent 70 percent of the economy. Traumatized by plunging home values and stock prices -- which have shaved at least $7 trillion from personal wealth -- they've curbed spending and increased saving. That's led directly to layoffs. In December, vehicle sales were down 36 percent from levels a year earlier.
Second: the financial crisis. Lower lending deprives the economy of the credit to finance businesses, homes and costly consumer purchases (cars, appliances). The deepest cuts involve "securitization" -- the sale of bonds. Investors have gone on strike. In 2008, the issuance of bonds backing credit card loans fell 41 percent and those backing car loans 51 percent.
Third: a trade crisis. Global spending and saving patterns are badly askew. High-saving Asian countries have relied on export-led growth that, in turn, has required American consumers to spend ever-larger shares of their incomes. Huge trade imbalances have resulted: U.S. deficits, Asian surpluses. As Americans cut spending, this pattern is no longer sustainable. Asia is tumbling into recession.
Overcoming any of these crises alone would be daunting. Together, they're the economic equivalent of a combined Ironman triathlon and Tour de France.
Consider consumer spending. The proposed remedy is the "economic stimulus" plan. This seems sensible. If government doesn't offset declines in consumer and other private spending, the economy might spiral down for several years. Last week, House committees considered an $825 billion package, split between $550 billion in additional spending and $275 billion in tax cuts.
But in practice, the stimulus could disappoint. Parts of the House package look like a giant political slush fund, with money sprinkled to dozens of programs. There's $50 million for the National Endowment for the Arts, $200 million for the Teacher Incentive Fund and $15.6 billion for increased Pell Grants to college students. Some of these proposals, whatever their other merits, won't produce many new jobs.
Another problem: Construction spending -- for schools, clinics, roads -- may start so slowly that there will be little immediate economic boost. The Congressional Budget Office examined $356 billion in spending proposals and concluded that only 7 percent would be spent in 2009 and 31 percent in 2010.
Assume, however, that the stimulus is a smashing success. It cushions the recession. Unemployment (now: 7.2 percent) stops rising at, say, 8 percent instead of 10 percent. Still, a temporary stimulus can't fuel a permanent recovery. That requires a strong financial system to supply an expanding economy's credit needs. How we get that isn't clear.
The pillars of a successful financial system -- the ability to assess risk; adequate capital to absorb losses; and trust among banks, investors and traders -- have crumbled. Underlying these ills has been the consistent underestimation of losses. Economists at Goldman Sachs now believe that worldwide losses on mortgages, bonds, and loans to consumers and businesses total $2.1 trillion. In March, the Goldman estimate was about half that.
All the new credit programs -- the Treasury's Troubled Asset Relief Program (TARP) and various Federal Reserve lending facilities -- aim to counteract these problems by providing government money and government guarantees. Obama probably will expand these efforts, despite some obvious problems: If government oversight becomes too intrusive or punitive, it might deter much-needed infusions of private capital into banks. Again, let's assume Obama's policies succeed. Credit flows rise.
Even then, we have no assurance of a vigorous recovery because the economic crisis is ultimately global in scope. The old trading patterns simply won't work anymore. If China and other Asian nations try to export their way out of trouble, they're likely to be disappointed. Any import surge into the United States would weaken an incipient American recovery and probably trigger a protectionist reaction. Down that path lies tit-for-tat economic nationalism that might harm everyone.
Indeed, if the rest of the world doesn't buy more from America, any U.S. recovery may be feeble. What's needed are policies that correct the imbalances in spending and saving. As Americans save more of their incomes, Asians should save less and spend more, so that they rely more on producing for themselves rather than exporting to us. The great trade discrepancies would shrink.
But this sort of transformation would require basic political changes in Asia. Whether China and other Asian societies can make those changes is unclear. The implications are sobering. The success of Obama's policies lies, to a large extent, outside his hands.